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"Obviously, a precise estimate cannot be made because other
factors are influencing price," said Darrel Good. "In addition,
the relationship between the crop size, consumption and price
varies over time. Still, the prospective crop size is a useful
question to pursue." Good's comments came as he discussed
recent developments in the corn and soybean markets, where
prices continue to move higher in anticipation of yield
reductions due to adverse weather conditions in the United
States.
"Soybean prices are also being supported by indications that
acreage in the United States fell short of March intentions, by
crop concerns in China and India, and by a rapid rate of
consumption of the 2004 crop," he noted.
"Corn price strength has been much more modest than the
increase in soybean prices, due to large current stocks and
indications that U.S. acreage exceeded March intentions."
A starting point for estimating the U.S. crop size can be
found in the USDA's current projection of the level of stocks at
the beginning of the 2005-06 marketing year and the magnitude of
consumption during the 2005-06 marketing year. The current
average farm price of corn and soybeans during the 2005-06
marketing year as reflected by the futures market can be
calculated based on a forecast of average basis and the monthly
distribution of farmer marketings during the 2005-06 marketing
year.
Good used the three-year average monthly basis and the
five-year average of monthly marketings (as a percentage of the
total for the year) to make the calculation. Using that process,
the futures settlement price from overnight trade on June 20
reflected an average 2005-06 marketing-year farm price of $2.40
for corn and $7.20 for soybeans.
"Given the USDA projections of beginning stocks and use and
the current forecast of the average marketing-year price, the
only missing factor is crop size," said Good. "Based on the
historical relationship, an estimate of the year-ending
stocks-to-use ratio implied by the current prices can be
calculated.
"The difficulty, as described in previous reports, is that
the relationship between price and stocks appears to have
shifted over time. For both corn and soybeans, the 'fit' between
stocks and price was quite strong from 1989-90 through 1997-98,
but a downward shift seemed to have occurred during the period
1998-99 through 2003-04, such that a given level of stocks to
use was associated with a much lower price during the latter
period."
Which of these time periods, if either, is appropriate for
forecasting the relationship in 2005-06? Good asked. For now, he
favors using the relationship during the earlier period, because
that relationship more closely reflects the stocks and price
situation being experienced during the current marketing year,
particularly for soybeans.
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"The average farm price of soybeans reflected by the current futures
market -- $7.20 -- implies a 2005-06 marketing-year-ending
stocks-to-use ratio of 5.8 percent," said Good. "Given the USDA's
projection of use of 2.964 billion bushels, the ratio implies ending
stocks of 172 million bushels, 83 million less than projected by
USDA and implying a crop size of 2.812 billion bushels.
"If harvested acreage of soybeans is near 72 million, rather than
the 72.6 million suggested by the March prospective plantings
report, the market is trading an average yield of about 39 bushels
per acre, compared to the trend yield of 39.9 bushels. Since
year-ending stocks cannot realistically be smaller than about 4
percent of use, a crop smaller than 2.765 billion bushels -- 34.8
bushels per acre -- would require consumption to be smaller than
projected by the USDA. The need to ration use can result in sharply
higher prices, at least for a period of time."
The average farm price of corn reflected by the current futures
market
($2.40) implies a 2005-06 marketing year-ending stocks-to-use
ratio of 13.5 percent, or 1.44 billion bushels if consumption is
near the 10.67 billion bushels projected by the USDA. That level of
stocks is 1.1 billion bushels smaller than the current USDA
projection, implying a crop of 9.885 billion bushels.
"If harvested acreage is near 75 million, rather than the 74.2
million suggested by the March prospective plantings report, the
market is trading an average yield of 132 bushels per acre, compared
to a trend yield of 145 bushels," said Good.
Good said that based on the historic relationship between the
last USDA crop condition report of the season and the average yield,
the percent of the crop rated good to excellent points to a soybean
yield of 39 bushels, and a corn yield of 132 bushels can be
calculated.
"That calculation is 53 percent good or excellent for soybeans
and 48 percent good or excellent for corn," he said. "Current
ratings are well above those levels.
"The price and yield exercise described here has a number of
shortcomings but might be helpful in judging when to price new-crop
corn and soybeans."
[University
of Illinois College of Agricultural, Consumer and Environmental
Sciences news release] |
